The BSE Sensex posted its biggest daily percentage gain in almost three weeks on Wednesday as private sector banks such as ICICI Bank rose on value-buying, while a weaker rupee bolstered software services exporters such as Infosys.
Investors seem to be pinning their hopes on the government being able to gain some traction on bills to liberalise the insurance, pension and banking sectors during the winter session of parliament which begins on Thursday.
"Going into the winter session, except the retail sector where there is a question mark, people are quite bullish on the market and a rally in December is expected," said Hitash Dang, vice president at Jaypee Capital.
Foreign portfolio flows continue to remain strong for the near term, added Dang.
However, the government, reduced to a minority for the first time since coming to power in 2004, is scrambling for support and its chances of success look bleak.
The benchmark Sensex rose 0.72 percent, or 131.06 points, to end at 18,460.38.
The broader Nifty rose 0.78 percent, or 43.25 points, to end at 5614.80, closing above the psychologically important 5,600 level.
Private banks such as ICICI Bank Ltd gained 2 percent after falling 2.5 percent in November as of Tuesday's close, while HDFC Bank Ltd ended 1.5 percent higher.
Shares in software services exporters rose, tracking the weakening rupee, which has fallen 2.4 percent against the U.S. dollar this month as of Tuesday's close.
Tata Consultancy Services gained 0.7 percent, while Infosys Ltd was up 1.1 percent.
Retail stocks rose on hopes that the FDI issue would be taken up in the winter session of parliament.
Pantaloon Retail India Ltd rose 4.7 percent while Shoppers Stop Ltd gained 2.3 percent.
Cipla Ltd shares rose 2.5 percent after the company offered to buy an about 51 percent stake in South Africa's Cipla Medpro , to strengthen its position in the fast-growing African drugs market.
SpiceJet Ltd gained 7 percent after The Financial Express newspaper reported a couple of key stakeholders in the company had resigned from the board of directors of Kal Airways, an investment vehicle that is the carrier's single largest shareholder.
The report sparked speculation that the resignations by Kalanithi Maran and his wife from Kal's board of directors could signal a potential change of ownership of SpiceJet.
Shares in Kingfisher Airlines Ltd rose 1.9 percent, after The Economic Times newspaper reported Blackstone Group offered to buy a prime office and retail real estate property from investment holding company UB Holdings, citing two people familiar with the developments.
A spokeswoman for Blackstone declined to comment on the report, calling it "a pure speculation story." A UB Group spokesman also declined comment.
Speculation over a potential cut in fuel taxes also helped Jet Airways gain 9.1 percent for the day.
However among stocks that fell, Honeywell Automation India shares closed at the maximum daily fall limit of 20 percent after Honeywell Asia Pacific said it plans to cut its stake in the domestic unit.
Honeywell Asia Pacific plans to sell shares in its Indian unit to meet market regulator requirements mandating listed companies must have at least 25 percent public shareholding by next year.
Shares in Indian software and back office provider MphasiS Ltd fell 0.9 percent after majority owner Hewlett-Packard Co took a $8.8 billion writedown after alleging a massive accounting scandal at its British software unit Autonomy.